Using Flexible Spending for Transit
IT PAYS TO RIDE PUBLIC TRANSPORTATION
"Rarely does an employee benefit save both the employee and employer money. But through a great twist of the
tax code, you may be able to commute with tax free dollars, and save your boss tax dollars, too."
Kiplinger's Personal Finance Magazine
Reduce Your Commuting Costs by Sheltering a Portion of Your Income From
It really does pay to ride transit! Federal law lets workers receive up to $110 a month in employer-paid tax-free
transit costs, or take up to $110 a month in tax-sheltered payroll deductions for transit costs.
The law allows employers to give their workers up to $110 each month for transit costs as a tax-free benefit. It
also allows employers to give employees the option to pay for commuting costs using pre-tax payroll deductions.
Alternatively, employers can share these costs with their workers by paying part of their monthly commuting
costs and letting workers pay the balance using pre-tax dollars. Either way, both employers and their employees
can save money by participating in this simple plan.
The Program In Brief
This summary describes federal law relating to transit commuter benefits, also called "transit pass benefits" or
"qualified transportation fringe benefits." Employer-paid transit commuter benefits are passes, vouchers, or
similar fare media, or sometimes just cash, provided to employees to cover their transit commuting costs.
Employee-paid benefits are the same benefits, paid for by reducing the employee's wages or salary before taxes
are applied. The law also permits employees and employers to split the costs of the benefits.
Employees do not pay federal income or payroll taxes on transit commuter benefits, except on the amount (if
any) in excess of $110 per month. Generally, state and local taxes do not apply either. Thus, transit commuter
benefits are treated much like other commonly available fringe benefits (e.g., employer-provided health
insurance). Employers can deduct their costs for providing such benefits and they avoid payroll taxes on such
benefits, regardless who pays.
Tax savings are available if an employer pays for the cost of the transit commuter benefits. For example, an
employer can buy transit passes from local transit agencies and distribute the passes without charge to
employees who sign up for the program.
Transit commuter benefits provide significant benefits for employers as well as employees. The employer's cost of
providing benefits can be deducted as a normal business expense. Even better, unlike ordinary wage payments,
employers do not have to pay their share of federal payroll taxes on transit commuter benefits. This payroll tax
savings alone is usually more than enough to cover any cost of administering the program.
Transit commuter benefits provide an attractive alternative to expensive parking benefits. While many companies
have offered parking benefits for years, smart employers are recognizing tax-free transit commuter benefits as
an environmentally responsible way to help their employees, while reducing congestion and cutting pollution in
the community. As an added benefit, employees arrive at work relaxed because they've avoided congested rush-
hour drives. It's a terrific fringe benefit that's affordable.
Finally, because federal law exempts the first $110 per month in transit benefits from federal income and payroll
taxes, and generally state and local taxes as well, the employer in this case effectively provides his or her
employees with a tax-free transportation bonus.
Employers can also share the cost of commuting with their employees by paying for part of the transit commuter
benefit and allowing employees to pay for the remainder using pre-tax dollars. That can be as much as $1,320 a
year in pre-tax savings!
Employers can allow their employees to purchase transit commuter benefits-in effect, pay for their own transit
costs-with pre-tax dollars. This is done by deducting the cost of the transit commuter benefits received by an
employee from the employee's paycheck each pay period.
The first $110 per month of commuting costs paid by the employee in this way will be completely exempt from
federal income and payroll taxes and generally state and local taxes as well. This will add up to tax savings of at
least $30 per month ($360 per year), and sometimes larger, for most employees.
Such pre-tax deductions from an employee's pay are comparable to those often used to pay for medical benefits
under a cafeteria plan, or retirement benefits under a 401(k) plan.
The law also permits employees to pay their own transit and qualified vanpool commuting costs with pre-tax
Benefits for Federal Employees
All federal employees in the Washington, D.C., area--from all three branches of the government -- are eligible to
receive employer-paid transit benefits up to $110 per month.
In addition, many federal agency employees across the nation continue to receive either employer-paid transit
benefits or the option to use payroll deductions for transit use under an executive order (##13150) from several
years ago. That executive order established a pilot program to provide federal employees of the U.S. Department
of Transportation, the U.S. Department of Energy, and the Environmental Protection Agency with employer-paid
transit benefits, and all other federal employees with the option to use payroll deductions for transit.
How It Works
A transit commuter benefit program is simple to administer. It does not require extensive record keeping. When
passes, vouchers, or similar fare media are available, employers need only keep a record of the purchase of the
media. In other cases, the employer must maintain records that reasonably demonstrate that any cash it pays to
employees is being used to cover their actual transit or vanpool commuting costs. Employers may offer different
transportation fringe benefits to their employees. Nondiscrimination rules do not apply to these benefits.
Although transit commuter benefits cannot be offered as part of a cafeteria plan, employers may use the same
forms and administrative procedures for a transit commuter benefit program that they use for their cafeteria
Employers may also rely on other parties to administer some or all of their transit commuter benefit program.
Employer-Paid Benefits Employers can pay for their employees to commute by transit or vanpool, up to a limit of
$110/month. With this arrangement, employees get up to $110 monthly in a tax-free transportation benefit.
Employers get a tax deduction for the expense. Employers have found that providing transportation benefits
offers significant savings over offering the equivalent dollar value to employees in the form of a salary increase.
Employee-Paid Benefits Employers can allow employees to elect to exchange up to $110/month in taxable salary
for a tax-free transit benefit. Employers save money overall since the amount exchanged is not subject to payroll
taxes. Employees save money, too, since the amount of an employee's salary exchanged for transportation
benefits is not subject to income tax, up to the specified monthly limits.
FREQUENTLY ASKED QUESTIONS ABOUT TRANSIT BENEFITS
WHAT IS THE TRANSIT COMMUTER BENEFIT?
The Transit Commuter Benefit was passed into law and revised in June 1998. Now you can ride transit, vanpool
or carpool (the carpool parking cost can reduce your tax burden) and deduct the cost of the pass, monthly
vanpool fare or monthly carpool parking fee from your salary.
The program allows employees to purchase transit passes, vanpool and carpool parking vouchers with pre-tax
dollars. It was designed to improve air quality, reduce traffic congestion, and conserve energy by encouraging
employees to commute by means other than single occupancy motor vehicles. The amount available to be
deducted each month is $110.
AM I ELIGIBLE FOR TRANSIT BENEFITS?
Private employers, non-profit organizations, and public agencies can provide transit commuter benefits to
employees, tax free. Federal government employees and members of the military services are also eligible to
receive transit commuter benefits. Federal government employees in the National Capital Region receive the
transit benefits under SAFETEA-LU. Under an Executive Order signed in April 2000, federal employees in other
areas of the U.S. are allowed to spend up to $110 per month of their pre-tax income for transit benefits. Self-
employed individuals, partners, 2-percent share holders of corporations, sole proprietors, and other independent
contractors are not eligible under IRS rules.
HOW DOES IT WORK?
You Pay: Your company allows you to pay for transit passes, vanpool fares or carpool parking fees through
payroll deduction, all with Pre-Tax dollars. You get the benefit of transit without paying taxes on the expense.
You & Your Company Share: You and your company share the cost of transit, vanpool or carpool parking. Your
company commits to paying a portion of the expense and the remainder is covered through your payroll
deduction, of course with pre-tax dollars.
Your Company Pays: Your company pays the entire amount and provides you with a transit pass, vanpool
voucher or carpool parking voucher.
WHAT TAXES ARE ELIMINATED?
Employees who choose to use pre-tax dollars for transit commuting services DO NOT pay federal income or
payroll taxes on transit, vanpool or carpool parking commuter benefits except (if any) in excess of $110 per
month. Generally, state taxes do not apply either.
HOW TO START A TRANSIT COMMUTER BENEFIT PROGRAM
The Transit Commuter Benefit program is easy to start, easy to administer, and does not require extensive record
keeping. When employees pay all of the cost, employers only need to keep a record of the purchase of transit
passes, vanpool vouchers or carpool parking vouchers. In situations where the employer pays for part or all of
the cost, records need to demonstrate that cash paid to employees is being used for transit, vanpool commuting
costs or carpool parking costs.
For employers: Although the Transit Commuter Benefit cannot be part of a cafeteria plan, employers may use
the same forms and administrative procedures for a transit commuter benefit program that they use for their
cafeteria plan. Employers may also rely upon other parties to administer the program.
FOR MORE INFORMATION:
Contact the American Public Transportation Association at for price information on the "It Pays to Ride Public
Transportation" brochure. You can also visit the Best Workplaces for Commuters' Web page at www.bwc.gov.
Ask the Benefits Coordinator at your company how the transit-pass benefit
can be implemented where you work!